By the close of trading on Friday, equity markets had undergone a significant shift in sentiment, as concerns over potential stagflation took center stage. Earlier in the week, leading indices had shown modest growth, suggesting that recession anxieties were easing. However, unsettling economic indicators and escalating tariff tensions reversed this trend dramatically. The University of Michigan's Consumer Confidence Survey revealed expectations at levels historically aligned with past recessions, while long-term inflation projections surged to their highest point in decades. Additionally, international responses to upcoming tariffs, such as Canada's discouragement of U.S. vacations, further unsettled investors.

Friday's market downturn was severe, with the Dow Jones Industrial Average plummeting by 710 points, marking a decline of 1.7%. Other major indexes also suffered losses exceeding 2%. This reaction was driven by fears of stagflation, a concerning combination of stagnant economic growth and rising inflation. Year-to-date performances reflected these challenges, particularly for tech-heavy Nasdaq and small-cap Russell 2000 indexes, which dropped by approximately 10%.

Recent economic data underscored slowing economic activity, with Q1 GDP growth projected at -2.8% by the Atlanta Fed's GDPNow model. While not definitive proof of a recession, the probability has increased significantly. Sequential negative GDP quarters traditionally define a recession, and Q2 forecasts hint at possible continued weakness. Consumer confidence measures, notably the Conference Board's index, have declined steadily, reaching their lowest point since 2013. Key sub-indexes indicate reduced optimism about business conditions, job prospects, and income expectations.

Sector-specific surveys, like the Philly Fed's Services Index, mirrored this pessimism, registering its lowest level since the pandemic. Corporate comments from companies such as FedEx, Nike, Lenar, and General Mills echoed these sentiments, citing weak demand, tariff impacts, and high interest rates as key constraints. International travel forecasts for the U.S. have been revised downward sharply due to retaliatory measures against tariffs.

Inflation expectations emerged as a primary concern for investors, spiking across recent surveys. Although current conditions do not fully replicate the 1970s wage-price spiral, heightened inflation fears contributed to market volatility. The labor market appears to be softening, despite official unemployment figures remaining relatively stable. Delinquency rates on consumer loans, including auto loans and credit cards, have risen, signaling potential strain on household budgets.

The Federal Reserve maintained interest rates at its March meeting, likely influenced by rising inflation expectations. Media coverage of tariff implications may have played a role in shaping perceptions of price instability. While the Fed adjusted its Treasury portfolio sales rate, indicating a cautious approach to monetary policy, expectations for lower rates remain postponed. Analysts anticipate that an impending recession will necessitate rate reductions beyond what is currently priced into markets.

As economic uncertainties persist, equity markets face ongoing challenges. Declining consumer confidence, coupled with elevated inflation concerns, continues to pressure major indices. Pending hard data confirmation of economic weakness could solidify recessionary trends, prompting further adjustments in monetary policy and investor sentiment. Ultimately, navigating these complexities will require careful assessment of evolving economic signals and policy responses.